How can market signals contribute to public startup funding?
The EU Commission has invited me to participate in a series of very interesting discussions about how to help tech entrepreneurs in the EU. The conversations have been very interesting and have given me the opportunity to exchange with entrepreneurs, universities, public and private organizations, and experts that support the development of startups in Europe.
One of the things that we discussed is how should to ensure that public funding on early stage startups does not bias the market, incentivising "good" ideas that nobody really cares about and ignoring others that are more needed.
My proposal, shared by other participants, is to follow market signals, so that it is the market that chooses and the public sector only reenforces those choices.
But the question is, which market signals?
Coinvesting is a good way to follow the market lead, but it should be investment from private investors, not from guarantee funds or banks (there are already mechanisms for that). They have a higher commitment to the success of the company, after all they've bet some of their own money in it.
The selection of the startups by a group of investors and entrepreneurs to participate in accelerator programs is also a good signal. They usually invest based on the quality of the team of people joining. It is not a school, they have very limited seats available and they work hard to help the startups grow quick. They have some skin in the choice (but are not fully committed.) The equity parts of these programmes are usually passive, they don't take part in the . They just wait for 5 or more years for a possible exit or buyout. To really make a difference they should also put their own money in the startups, commit themselves, not just distribute somebody else's funds.
These are some example of accelerator programs and of a public investment scheme to promote web entrepreneurship.
- Enterprise Ireland: €50 000 for new startups and €250 000 in coinvestment, companies have to setup shop in Ireland and 10% of the company goes to EI.
- Y-combinator: acts as a fund on top of accelerating a very select group of startups. Investments of up to US$80 000 for the next batch in exchange of 2-10% participation.
- TechStars: US$18 000 to the selected participant startups plus a convertible loan of US$100 000, in exchange of +- 6% equity.
- Wayra: US$ 50 000 in exchange of 5-10% of the equity.
Sales would be too tricky to take into consideration, with a lot of different schemes and most of the startups would be to early in their development to have any sales at all.
In my view, it would be even more interesting to incentivate the investment with a tax-shelter for early stage investment. There are already mechanisms like this in France and the UK where what the tax-shelters are doing is taking out part of the risk. One way to do this could be to create a European fund that would give part of the money back in case of a failure, but the investment has to fall within the scope and be registered when it is done, not after.
How would you do it?